Deutsche Bank Warns of a Dangerous Gap Between U.S. Equity and Credit Markets

• The Bank records a divergence in risk assessments between equity and credit markets.
• Credit spreads are expected to widen and defaults are expected to rise until mid-2026.
• Investors are advised to prepare for increased volatility and review strategies.

Equity and credit markets are no longer moving in sync, which is a concern for Deutsche Bank. Analysts note that optimism in the stock market contrasts with tighter conditions in the credit market, where investors are laying down increased risks and deteriorating economic conditions.

According to the bank, the current situation reflects the growing gap between the assessment of risks in the two sectors. Experts are confident that such a state of affairs cannot be considered sustainable in the long term.

The report emphasizes that the imbalance was affected by:

• growth of marginal debt;
• high cost of borrowing;
• persistent inflation;
• geopolitical uncertainty.

Against this background, the bond market is signaling possible problems in the corporate sector, analysts emphasized. At the same time, stocks, primarily technology companies, continue to trade at elevated valuations.

Deutsche Bank estimates that the credit market could face an 80-120bp widening in US high-yield bond spreads over the next 12 months and defaults could rise to 4.8% by mid-2026.

This is at odds with the dynamics in the equity market, where confidence in solid corporate earnings growth remains. An additional risk factor is said to be rising delinquencies in consumer lending, including cards, student loans and auto loans.

Companies with a significant debt load, issuers with speculative ratings and businesses dependent on the high-yield bond market are particularly vulnerable, the report says.

As the bank’s representatives note, capital appreciation may lead to a reduction in investment and make refinancing more difficult. Companies with stable liquidity, predictable cash flows and minimal dependence on external financing remain the winners.

Deutsche Bank points out that divergence between markets can lead to unexpected adjustments and erroneous capital allocation. If unfavorable developments occur, there could be increased losses at banks and funds, reduced lending activity and pressure on corporate balance sheets.

Regulators are already monitoring the situation, experts said. If the stress intensifies, measures may be required to stabilize liquidity, tighten credit standards and control risks.

Historical parallels — from the dot-com bubble to the 2008 crisis — serve as a reminder of the consequences of underestimating risk, Deutsche Bank believes.

The coming months, according to analysts, may pass in conditions of increased volatility. It is especially actual for highly appreciated shares and companies with large liabilities.

Three scenarios are possible next, the analysts said. They are a mild adjustment and gradual leveling off of valuations, a sharp downturn with increased credit pressure, or a prolonged period of multidirectional dynamics without a clear trend.

The key indicators suggested to watch are:

• interest rate trajectory and Fed signals;
• default and delinquency rates;
• the ability of companies to refinance debt;
• demand for high-yield bonds;
• geopolitical events and their impact on inflation.

Deutsche Bank concludes by noting that the market is entering a period where the fundamental strength of companies and the quality of their balance sheets will play a key role.